Why Is A HOA Reserve Study Done?

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An HOA reserve study is an essential tool for determining HOA reserves. What are its components, and is it really necessary for planned communities? Let’s find out. 

What Is an HOA Reserve Study?

A homeowners association reserve study is a tool that allows HOAs to determine how much they need in their reserve funds. It’s an in-depth analysis of the community’s financial standing and assets that estimates how much the HOA should anticipate spending in the future. 

Generally, an HOA reserve study has two parts:

  • Physical Assessment. A reserve study physically inspects the community’s common areas and assets to determine their current condition. It allows the HOA to anticipate the next major repair or replacement and determines the cost of those projects. 
  • Financial Assessment. A reserve study reviews the HOA’s current financial standing by reviewing its income, expenses, and reserve fund. The financial assessment helps the HOA understand its financial situation and whether it can make future expenditures.

Types of Reserve Studies

Reserve studies have four different types. Each one will vary in cost and have different levels of inspection. 

  • Preliminary Study. A preliminary study is conducted before the HOA’s completion. It provides estimates based on architectural and engineering plans. 
  • No On-Site Visit. A study without an on-site visit draws conclusions based on discussions with the HOA vendors, personnel, and board members.
  • With On-Site Visit. A study with an on-site visit includes a physical inspection of the HOA common elements and updates their estimated value. It also updates the HOA’s funding plan and fund status.
  • Full Reserve Study. A comprehensive reserve study assesses the condition of assessments, conducts financial analyses, and takes account of inventories and components. 

Why Is an HOA Reserve Study Important?

An HOA reserve study provides several benefits.

1. HOA Property Evaluation

HOA reserve studies evaluate the association’s properties and assets, giving insight into their current condition. It allows the HOA to plan for inevitable repairs and replacements that come with deterioration. With this in mind, the HOA can get a clear picture of its physical and financial well-being. 

2. Budgeting for Major Expenses

An HOA reserve study allows the HOA to develop a financial plan to meet future expenditures. With this plan in place, the association knows what it needs to do to increase revenue and decrease unnecessary expenses where possible. 

3. Avoiding Surprise Assessments and Increases

A reserve study is essential to determining how much the HOA needs in reserves. Without it, the HOA’s reserve funds might not be enough to cover major expenses. This can lead to surprise increases in regular or large special assessments. It’s not fun for anybody — not the board or the community members. 

4. Stop Issues from Getting Worse

A reserve study can help the HOA pinpoint problem areas in the community’s common elements—even minor ones. With this information, the HOA can address even the smallest issues and prevent them from getting bigger, saving money in the long run. 

5. Legal Compliance

Some states require HOA reserve studies. HOA board members must keep their state requirements in mind and remain compliant. Otherwise, the HOA could be held liable if anything happens and someone files a lawsuit.

6. Community Transparency

The community members have a right to know how well the association is doing. A reserve study will give them an idea of the HOA’s financial status and physical condition. Keeping them in the loop also fosters trust within the community. 

7. Obtaining Insurance and Financing

Some lenders and insurance providers require a physical or financial assessment before they agree to partner with you. A reserve study may help if the community wants ample insurance coverage or financial assistance.

8. Enhance Property Values

Reserve studies allow HOAs to fix what needs to be fixed and remain financially stable. Ultimately, ensuring the reserves are fully funded can contribute to better community appeal and increase property values. 

When Should HOAs Conduct a Reserve Study?

In some states, homeowners associations need to conduct a reserve study periodically. For example, Civil Code Section 5550 states that HOA boards in California must conduct a study every three years and review the study yearly. It’s important to check state law and follow any requirements it may have.

Besides the law, HOAs should also consult their governing documents to determine HOA reserve study requirements. Some may require the board to conduct a study every few years, while others have yet to have any requirements. 

Regardless of these requirements, a reserve study for HOAs is typically conducted every three to five years. Homeowners associations update them to determine whether they’re still on the right track or need to adjust their financial planning. To stay financially healthy, conducting a reserve study every year is best to avoid special assessments. 

How Much Does an HOA Reserve Study Cost?

HOA reserve study companies often conduct the reserve study for these communities. However, because they’re so complex, the cost of a reserve study can vary greatly from community to community. Moreover, the cost of each study can vary by type.

A comprehensive reserve study will be the most expensive. It often involves an exhaustive evaluation of the association’s financial condition and physical assets. Depending on the company, a full reserve study can cost around $1,800 or more. 

The second type of reserve study needs an on-site inspection but does not examine the HOA as extensively as the first. It often costs somewhere between $600 and $1,800. Finally, the cheapest reserve study costs around $250 to $500. It is affordable because it does not require a site visit. 

Keeping Your Community Financially Healthy

A reserve study may not always be required by the law or governing documents, but it’s still essential to financial health. If your community hasn’t conducted one in a while, consider hiring a reserve study company to assess your community today. 

Do you need help finding a reserve study company or managing the reserve funds? 88 Doors is just the company you need. We offer high-quality professional management to communities. Call us now at (512) 348-8821 or get in touch with us online to know more!